DATE: 1/27/11
Electric industry de-regulation was supposed to lower cost through competition but many residential customers saw their electric bill increase almost $500/yr! As recently as 2003 our electric rates were competitive with the rest of the nation but now are 36% more. For industrial users the cost differential is an even higher 48% (9.3 cents/Kilowatt hour vs. 6.3 cents/KWh) making Delaware unattractive as a place to locate new industrial facilities. For all users, the cost penalty totaled $350 million in 2009 based on information from the US Energy Information Agency.
Before deregulation companies such as Delmarva Power owned both electric power generating capacity and the distribution system to bring power to your home. It was efficient for the government to grant monopoly rights to one company rather than have duplicate systems. Those monopolies were regulated by a Public Service Commission (PSC) responsible for approving both physical changes to the system and prices. Nationally, this system was very effective at expanding service everywhere and in providing inexpensive power.
In the 1990’s a movement started to open the electric power market to competition with the idea it would lower the price of electricity. The distribution system, the wires, sub-stations, etc., would still be owned by the monopoly power distribution companies and would still be regulated by the PSC. The generation portion of the bill would be open to competition. De-regulation, also called restructuring, became law in Delaware in 1999 with full implementation planned for 2006. Municipal power companies were exempted. In all, twenty-one states passed similar laws. In Delaware, only one new company entered the residential market offering slightly lower prices but a large cancellation charge. Only 4% of customers have opted for the choice.
Several things happened during implementation of the new law. First, power companies sold their generating facilities. This re-set the clock on the value of those plants based on the purchase price and stockholders demanded higher returns on the investment which would no longer be restricted by the PSC. Secondly, fuel prices went up dramatically. Between 2004 and 2005 coal prices increased 33% and natural gas prices increased 240%! The regional wholesale price of electricity went from 4 cents/KWh to 10 cents/KWh. Thirdly, there are a limited number of regional generating companies with excess capacity so it is really not a free, competitive market. Finally, as recently as 1995, generating capacity in Delaware met 82% of electricity used in the state but is now less than half that amount. A combination of trends including tougher environmental regulations, limits on development such as the Coastal Zone Act, and low profit margins made it unattractive to build new generation capacity in Delaware. By 2008, generation in Delaware was down to 57% of use and is expected to drop to 38% by 2014 as power plants are closed. Delaware will be exporting 300 direct power plant jobs and 600 indirect jobs in 2014 by importing so much electricity. Local production lowers transmission losses, limits grid congestion, and keeps voltage high, all important issues in providing low cost, reliable service.
Interstate sale of electric power is common. A regional entity, PJM, manages the regional grid and makes sure power goes where it is needed. They set wholesale rates in part based on transmission costs and on peak power costs. Before de-regulation, generating plants received a reasonable profit on what it cost them to generate power with a slight premium during peak use. Now prices are set by the “market clearing price”. Generators bid to provide power at any given moment and power goes into the system from lowest to highest price. The last, highest price, bid sets the market clearing price during peak periods. So, now we see peak power selling for a four to ten time premium even from plants with only marginally higher costs. In addition, PJM now charges a “capacity reliability” fee when power is sent to a location with transmission constraints. A “Locational Marginal Pricing” fee is also charged and is designed to encourage new generating capacity in areas, such as Delaware, that import a large percent of their power and cause grid congestion.
In 2005, Delmarva Power announced rates would increase 52% causing a panic. Delaware considered re-regulation but opted to spread out the increase for three years instead. Eight other states facing similar increases re-regulated the industry. Virginia is a good example of a re-regulated state. The major power company, Dominion Power, was allowed to get back into the generation business with a guaranteed profit margin from the Virginia PSC. Virginians electric rates are right at the average of other regulated states at $.089/KWh while the Delaware average price rose to $.121/KWh.
David T. Stevenson
Director, Center for Energy CompetitivenessCaesar Rodney Institute
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